Field of the Invention
The subject disclosure relates to methods and systems for creating, offering, and administering financial products such as annuities, life insurance, and other policies issued by life insurance companies.
Background of the Related Art
In general, investment products directed to implementing a savings vehicle for consumers have had a number of drawbacks. For example, these products are typically specialized savings products which are acquired and administered by companies and systems that are distinct (at least from the consumer's perspective) from the everyday financial tools the general public is comfortable with, such as credit cards or bank accounts. As such, persuading consumers to sign up for these savings vehicles can involve challenges in familiarizing consumers with the products, integrating the products with consumers' everyday lives (and the related computer administration of the products and related services), and connecting with consumers through different marketing channels. Existing systems are also deficient in providing financial products that promote customers to save by participating in an investment product and also provide additional spending capability to consumers in connection with the saved principal. Investment products oftentimes “lock up” the invested capital, for example, for the purpose of accumulation. In such products, the saved principal in the financial account will likely have restrictions on the ability to withdraw from the investment or may include withdrawal surcharges.
One industry example demonstrating deficiencies in the prior art are retirement products offered by the life insurance industry. Retirement products offered by the life insurance industry, typically in the form of deferred or immediate annuities, attempt to provide the policyholder tax-preferred accumulation of assets which can then, at the option of the policyholder, be used to convert to a tax-preferred income stream that the policyholder may not outlive.
Deferred annuities are typically designed by the industry to have an accumulation phase followed by an optional annuitization phase. During the accumulation phase, interest is credited to the policyholder's account value and these credits are not currently taxed. In exchange for not being currently taxed the policyholder is penalized for early terminations or surrenders—typically in the form of a significant surrender charge imposed by the issuing company, and by the IRS in the form of a 10% penalty tax in addition to the ordinary income tax rate on any earnings in excess of the policyholder's basis in the annuity, should the earnings be withdrawn prior to the policy owner attaining age 59½. Accumulation earnings are taxed using ordinary tax rates which can approach 50% at the state, federal and local (if applicable) level—upon any withdrawal. If the accumulation amounts are used instead to fund a lifelong stream of annuitization payments, the earnings in excess of basis are still taxed at ordinary rates, with an amount allocated to principal which is excluded each year. Effectively, then, annuities provide tax benefits which amount to “deferred ordinary” treatment on any earnings. This is similar, but not identical to, qualified retirement accounts such as 401(k)s, which also provide for deferred ordinary tax treatment of earnings.
The amount of tax efficiency provided by deferred ordinary treatment on earnings is not very significant—even over relatively long periods—and this can be a major flaw in the current products offered by the life insurance industry. For example, consider a policyholder who pays state, local, and federal tax at a combined 40% ordinary marginal rate. Assume the policyholder chooses between holding an annuity for 20 years and then withdrawing the proceeds versus holding an account which is currently taxable. Assuming a pre-tax interest rate of 5% on both products, the taxable account obviously produces an after-tax yield of 3% (tax is 40% of 5%, or 2%, or 200 basis points). In the annuity case, the accumulation at 5% for 20 years results in an amount of gains of 1.65 per dollar invested. The 1.65 is taxed at ordinary rates, leaving the policyholder with after-tax proceeds, including basis, of 1.992 units per dollar invested, for an annualized after-tax return of 3.51%. Thus the annuity has provided a 51-basis-point “pickup” in after-tax yield compared to the taxable account (3.51% for the annuity with deferred ordinary treatment assuming no 10% penalty, versus 3% for the currently taxable account example). While not completely insignificant, the tax benefit of 51 basis points reflects the limited nature of deferring ordinary taxation. At the same time, the policyholder must forego liquidity at the risk of paying tax penalties and surrender charges. In particular, the surrender charges result from the need of life insurance companies to pay sizeable commissions to agents to sell annuity products, ironically, in part, due to the small pickup in benefits at the expense of multi-year illiquidity.
In the life insurance industry example, as mentioned above, the prior art is lacking due to the failure of providing real purchasing or consumption power protection during the accumulation phase so that consumption derived from annuitization dollars are not eroded due to inflation—both expected and unexpected—operating over long periods of time and due to unfavorable taxation. Thus, current state of the art annuity products provide inferior after-tax and after-inflation returns, i.e., after-tax real returns, which are the primary risk-adjusted quantities that matter for deferred consumption, are inferior in the current art.
Also, to the extent current-art annuities underperform on a real after-tax basis, they impose risk on policyholders that their lifetime consumption during annuitization will be lowered or will not provide the longevity protection that annuitization is exactly designed to provide.
At least one new product to achieve the objectives of superior (1) after-tax, (2) after-inflation, and (3) lifetime consumption is needed.
Other deficiencies may also exist in existing products and related systems and methods that would be evident to those of ordinary skill in the art.